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In an increasingly interconnected world, few businesses can ignore the global trading environment. Whether a firm exports, imports, competes with foreign producers or sources materials internationally, the rules and dynamics of international trade profoundly shape its strategic position. This lesson covers the second part of AQA specification topic 3.7.5.
International trade allows countries to specialise in producing goods and services where they have a comparative advantage — meaning they can produce at a lower opportunity cost than other countries. Trade increases total output, provides consumers with greater variety and lower prices, and gives businesses access to larger markets and cheaper inputs.
| Benefit | Explanation |
|---|---|
| Larger markets | Exporting allows businesses to sell to billions of consumers rather than a domestic market alone |
| Economies of scale | Larger output volumes reduce average costs, improving competitiveness |
| Access to resources | Businesses can source raw materials, components and services from wherever they are cheapest or best |
| Risk diversification | Operating in multiple markets reduces dependence on a single economy |
| Competitive stimulus | Exposure to international competition drives innovation and efficiency |
Free trade means the absence of government-imposed barriers to the movement of goods, services and capital between countries. It is promoted by organisations such as the World Trade Organisation (WTO) and through bilateral or multilateral free trade agreements (FTAs).
| Agreement | Coverage |
|---|---|
| UK-EU Trade and Cooperation Agreement (2021) | Zero tariffs and zero quotas on goods, but introduces customs checks, rules of origin requirements and regulatory divergence |
| CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) | The UK acceded in 2023, gaining preferential access to markets including Japan, Australia, Canada, Vietnam and Malaysia |
| UK-Australia FTA (2022) | Eliminates tariffs on most goods over a transition period |
| WTO rules | Provide a baseline of trading rules when no specific FTA exists |
Protectionism refers to government policies that restrict international trade to protect domestic industries from foreign competition. The main instruments of protectionism are:
| Measure | Description | Example |
|---|---|---|
| Tariffs | Taxes on imported goods, raising their price | The UK applies tariffs on Chinese steel imports to protect domestic steelmakers |
| Quotas | Physical limits on the quantity of a good that can be imported | EU quotas on textile imports from developing countries |
| Subsidies | Government payments to domestic producers, giving them a cost advantage | EU Common Agricultural Policy (CAP) subsidies to European farmers |
| Administrative barriers | Complex regulations, customs procedures, labelling requirements that make importing difficult | Post-Brexit customs documentation requirements between the UK and EU |
| Embargoes | Complete bans on trade with a particular country | UK/EU sanctions on Russian oil imports following the invasion of Ukraine |
| Argument | Explanation |
|---|---|
| Infant industry | New industries need temporary protection from established foreign competitors until they achieve economies of scale |
| National security | Strategic industries (defence, energy, food production) should not depend on foreign suppliers who could cut off supply |
| Protecting jobs | Free trade can cause structural unemployment when domestic industries cannot compete with cheaper imports |
| Anti-dumping | Foreign firms may sell below cost (dumping) to destroy domestic competitors, then raise prices once competition is eliminated |
| Environmental/labour standards | Domestic firms face higher costs due to stricter regulation; protection levels the playing field |
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